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FAREED ZAKARIA, HOST: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to our viewers in the United States and around the world. I'm Fareed Zakaria.

We begin today with Haiti. I want to go beyond the terrible images that you've seen in the last days, tragic as they are, and try to help us understand this tragedy and how it came to be this way.

Everybody surely knows by now that Haiti is the poorest country in the entire Western Hemisphere. But that's not the whole story. You see, Haiti has been marked by violence, turmoil and tragedy from the start -- until recently, when things turned up, only to be dashed by this earthquake. And that start informed the tragedies that have befallen this country ever since.

So, a quick history lesson, one that I think is fascinating on its own merits and is essential to understanding Haiti today.

The island that came to be known as Hispaniola was discovered by Europeans when Christopher Columbus landed there in 1492. Two hundred years later, in 1697, the French gained control of the western third of this island. African slaves, growing sugar and coffee and tobacco there, became a veritable gold mine for the French.

But then, in 1791, the slaves revolted. It's been called the Vietnam War of its time, a ragtag band of insurgents defeating one of the greatest militaries of the age. None other than Napoleon Bonaparte sent tens of thousands of his French troops. They all tried to beat back the rebellion, and they all failed.

On New Year's Day, 1804, the last defeated French ship left the island, and the slaves declared victory. And Haiti, the nation that emerged, is the only nation in the entire world that was founded by slaves.

But the elation from emancipation didn't last long. The nation was very poor, made poorer by the French who demanded a large indemnity for losing the war. The plantation system, along with much of the rest of the country, had been ravaged by the war. And the vast majority of the population didn't know how to do anything but farm for a master.

Furthermore, the world was wary of this nation of half-a-million newly freed blacks. The United States, for example, didn't recognize Haiti for the first 58 years of its existence until 1862, a year after the U.S. Civil War began. And that was the official beginning of what continues to this day to be a difficult relationship.

In 1915, the U.S. sent in a landing force to occupy the island nation. The Haitian president had just been assassinated. The country was in a state of chaos. And some say that America simply wanted to protect its investments there.

Whatever the reasons for coming, the Americans stayed for almost 20 years. And it was an often brutal occupation. The Americans under Franklin Delano Roosevelt withdrew, but essentially of their own volition, in 1934. Haiti remained a troubled and deeply chaotic place.

Sixty years later, the Yanks were back. In 1994, under the Clinton administration, the American military went in again. This time they came to restore democracy. And two years later, Haiti saw for the first time in its then-almost 200-year history, a peaceful transition of power from one democratically elected president to another.

But then, the earthquake. And late Wednesday afternoon, of course, America returned again -- this time, not just with military might, but with aid workers, search and rescue teams, doctors, nurses and much more.

The response from the rest of the world has been strong. But the response from America has been extraordinary. It's a wonderful example of the power of America to do good, and do it fast.

So, on today's show, a different kind of panel on Haiti -- some smart writers and novelists, all intimately familiar with the island nation, to discuss many of the issues I've just raised.

Then, Christine Lagarde, the powerful finance minister of France, with her drastic solution to the problem of banker bonuses.

Let's get started.

(BREAK)

ZAKARIA: Now, to discuss how Haiti may go on from here, joining me are, from Boston, the Pulitzer Prize-winning writer, Tracy Kidder. He is the author of, among many other works, "Mountains Beyond Mountains," a book about an extraordinary man named Paul Farmer and his efforts to bring hope to Haiti.

From Washington, Madison Smartt Bell, who has written more than a dozen books, including "Toussaint L'Ouverture," a fascinating biography of the leader of the Haitian revolution.

And in Los Angeles, journalist Amy Wilentz, who lived in Haiti through the '80s and '90s, reporting on its political turmoil and unrest.

So, what should happen going forward? Tracy Kidder, you saw one man trying to make a difference. But a lot of people feel, all right, you put in a lot of money, help as much as you can. But the long-term solution has to be to give Haiti's economy some kind of internal strength of its own, some internal vitality.

From what you saw, what's the solution? What will allow Haiti to stop being a kind of basket case, always dependent on Western aid, and to really become a viable nation economically, as well as politically?

TRACY KIDDER, AUTHOR, "MOUNTAINS BEYOND MOUNTAINS": Well, you know, the only honest answer is to say that I don't know. I'm not a development expert, though I don't trust them particularly, either.

But I do think that there's really no hope unless the effort to rebuild is well-coordinated, and unless it involves the Haitians, and unless it begins to strengthen Haitian institutions. The Haitians are perfectly willing to do this.

I think that part of what's required is that these, particularly the aid organizations and the United States USAID, which, you know, badly needs reforming, that they understand that the only way to help Haiti out of this mess is to instill expertise and infrastructure.

Part of the problem in Haiti, it seems to me, now, is these 10,000 or more NGOs, private aid organizations working there, without any coordination. Basically, they've taken over a huge percentage of the functions of a government. But it's the worst kind of government you can possibly imagine -- no coordination and no accountability at all. Because the whole point is to try to make these kinds of efforts Haitian.

ZAKARIA: Amy, what is your thought about this issue of the cultural conditions in Haiti that make it backward?

Because there's a lot of people, you know, Sam Huntington and people like that, who used to study culture and development. Haiti was the poster child of a place with a kind of culture that was inimical to economic success. There's just all kinds of attributes that meant they didn't take pride in possession, they didn't work hard, all this kind of thing.

Well, you lived there.

AMY WILENTZ, JOURNALIST AND AUTHOR, "I FEEL EARTHQUAKES MORE OFTEN THAN THEY HAPPEN": Yes, I lived there. And I totally disagree.

Speaking of pride of possession, they do have pride of possession. They're a deeply, deeply capitalist country, from the littlest guy on the street to the richest man on the top of the mountain. So I don't agree with that.

And what I think is that Haiti had two problems. One is, it came of age at a time when, to be an independent black nation was not appreciated by the slave-holding countries that still existed. And the other is that, in a Christian world, there were a lot of people in Haiti who were following African traditional religion. And this also was not appreciated in the rest of the world.

So, I think when you see Pat Robertson saying that Haiti is cursed because of its culture and the pact it made with the devil, you know, these are very retrograde attitudes toward Haiti. And Sam Huntington can be put in that pile, I think.

But what worries me is not so much these big thinkers, supposedly, and big, eloquent church people. What bothers me is the normal person, the average person, who also has adopted these attitudes toward Haiti, not realizing what they come from. And they come from prejudice.

ZAKARIA: Madison, what is the attitude in Haiti about foreigners coming in to help? Because this is a country with a very long suspicion -- some would say deservedly so -- of foreign powers.

Do they view these NGOs, by and large, as a good thing? Or is there a deep-seated suspicion of foreign involvement in Haiti?

MADISON SMARTT BELL, AUTHOR, "ALL SOULS' RISING": I think that they're totally willing to cooperate with getting help that really is help.

But one of the problems that does occur is that people from our religious right go down there, because they want to combat the devil -- which to Haitians is their religion, one of the great religions of the world, I'll say -- and that also, we in the United States -- just another example, there are all sorts of things like this -- we tend to export our political divisions there, thus creating confusion in our foreign policy with them.

ZAKARIA: Amy, what do you think of this issue of anti- Americanism, and how they will view the American involvement, particularly beyond the purely relief efforts, but ones, perhaps, to restore political stability?

WILENTZ: It's definitely -- they're caught between a feeling of wanting to remain proud and independent, and utter devastation caused by this earthquake. So, what's happening is, this is an opening for, you know, things that Haitians otherwise would not want, like the Marines coming in again.

They're an extremely practical people. They're going to say, OK, we need this now, we need the help. And it's going to be clear very soon, if not already, that they're going to need the help for rebuilding the country, too.

I hope that it can be, you know, cooperation of the willing, so that the United States is not the only one there. Taiwan has been a long supporter of Haiti, and they can help out.

TRACY KIDDER, AUTHOR, "MOUNTAINS BEYOND MOUNTAINS": So many of the attempts to help Haiti turn out to be self-serving, even though I think they're well-intentioned, many of them. And I mean self-serving -- obviously, it's financial. I think some of these are just rackets. But I think many are very good.

But if the purpose of the mission to Haiti is religious, or even educational, for the people who are conducting the missions, that's beside the point. That's not what they should be doing there. They should be trying to help the Haitians become stronger, so that all of these -- all of their projects can become exclusively Haitian.

And that means working with the government. And the usual excuse for not working with the government is that it's corrupt, or it's weak. But, of course, that's all the more reason to work with the government.

This stuff is not -- it's hard to do. No one ever said it would be easy, you know.

ZAKARIA: Madison, you've written a lot of novels about Haiti 200 years ago. If you were to write one today, what is the sort of central conflict, dilemma, that you see that you would want to pick up? And if you were to write "All Souls' Rising" about Haiti today, what would it be about?

BELL: One of the reasons this earthquake disaster is producing such horrific loss of life, is that for 30, 40 and 50 years, people have been moving out, or essentially being starved out of the countryside, coming down to these poorly constructed slums around the capital. And those are the people who are getting killed now, and the vast majority, I'm afraid.

For me, one of -- not every idea that Aristide had was good. But the idea of working toward some sort of agricultural auto-sufficiency was a good idea, not an impossible idea. It would lead to reforestation and ultimately, I think, a decent amount of control of the Haitian people over their own destiny. That sounds less like a novel than a political program. I'm sorry.

ZAKARIA: Amy, if you were to...

KIDDER: Those are also good novels, Madison.

ZAKARIA: Amy, if you were to write a book or article going forward, what is the -- what is your solution, long-term solution for Haiti? How do you get it to be more viable?

WILENTZ: Well, you know, self-respect and involvement -- these are the key issues in Haiti. I totally agree that the Haitian government has to be empowered.

Well, you can't be a grown-up unless you're allowed to behave like a grown-up. And that is really what has to happen in Haiti. The parents can't just keep bossing everybody around. People have to be allowed to take control of their own lives.

And I think that, you know, the only possible, small silver lining in this terrible, terrible catastrophe, is that it provides an opening for new ways of thinking about Haiti. And it's put us all on your show to talk about new ways of thinking about Haiti. And I believe that the Obama administration, which has Haitians at a very -- Haitian Americans -- at a very high level, has the capacity to really think in new ways about our relationship with Haiti and about empowering Haitians to take control of their own fate and rebuild their country.

ZAKARIA: Amy Wilentz, Madison Smartt Bell, Tracy Kidder, thank you all. A very, very important discussion about a tragedy in Haiti. Thank you.

(BEGIN VIDEO CLIP)

ELIOT SPITZER: If I'm playing, and it's your risk when things go south, but my game when things turn out, then you get a fundamental asymmetry. And the problem we've had in Wall Street is that banks used to lend, keep part of the risk, and therefore, judgment was inherent in that decision. And when you...

ZAKARIA: Because they were gambling with their own money.

SPITZER: Their own money.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: This week, America's most powerful bankers went to Capitol Hill to answer some tough questions.

Joining me now are some very bright people with tough questions of their own -- and some answers, as well.

Eliot Spitzer is the former governor of New York. He is now teaching public policy at City College in New York.

David Frum was an economic speechwriter for President George W. Bush. He is now a journalist and wears many hats.

Naomi Klein is a journalist and author of the "New York Times" best-seller, "The Shock Doctrine."

And Stephen Dubner is the co-author of the wildly popular "Freakonomics" book, so he's half a freak, or whatever you want to call it.

(LAUGHTER)

Welcome to all of you.

Eliot Spitzer, you listen to these hearings taking place. What do you think is the purpose? I mean, what should be the purpose of financial regulation moving forward?

ELIOT SPITZER, FORMER GOVERNOR OF NEW YORK: The critical issue that Congress and the president have not addressed, what should a bank do? It sounds kind of silly. But we are creating these institutions, these too-big-to-fail institutions right now, with unlimited access to federal dollars, and permitting them to speculate, move that capital overseas. That is not and should not be the purpose of the federal guarantee and access to federal tax money.

We need to get them to lend to business.

ZAKARIA: One of the things that -- I think the "Times," actually, had this great blog. They asked a bunch of people, what questions would you ask the bankers?

And David Stockman, the OMB director under Ronald Reagan, said, what you should do is really separate out the FDIC-insured part of the bank and almost create a separate bank, because that is the part that's government insured, government guaranteed. And they shouldn't be allowed to do anything...

SPITZER: This is precisely the schism many of us have been talking -- it's not only David Stockman. And I say that with all kudos to him. It is Paul Volcker. It is Nick Brady.

This is a bipartisan perspective, that institutions that have a federal guarantee, have access to tax dollars, should not be speculating with that money. Their purpose should be to do what banks traditionally have done, which is to lend.

And remarkably, that is why our economy is suffering right now. Banks are not lending. They're making money in proprietary trading, all the very sophisticated trades.

And as we said, we have socialized risk, privatized gain. They get the upside. We cover the downside. Of course you will continue to get this very unfair and wrong, this equilibrium in the marketplace.

ZAKARIA: David Frum, you are a fire-breathing conservative. Do you feel like this is kind of moving us towards the bad regulatory structure that limited banking in the '70s?

DAVID FRUM, FORMER SPEECHWRITER FOR GEORGE W. BUSH: Well, we're not there yet, but I do worry about it.

Back in the '90s, there used to be a saying in Silicon Valley, that the thing that made the United States the greatest country on earth was that it was the only place where you could borrow $100 million without owning a suit.

(LAUGHTER)

And I think that's something we want to protect. This is where the world comes to get capital -- not just Americans, the whole world -- to get capital for new ideas.

Risk is inherent in banking. Banks, no matter how regulated, will still borrow short and lend long. You can't avoid that. What we want to make sure is that there are lively, active and creative ways for people with new ideas to get capital. And that's why some of these Republican members who are involved in this commission are going to be speaking up very loudly and make sure that they protect the dynamic creativity of the American economy.

ZAKARIA: But then, you know, presumably, you would not be in favor of a federal guarantee. I mean, in other words, you can't have it both ways. You can't say, we want to have all this risk and we want to maintain it, but if it goes south, the federal government comes in.

FRUM: We're fiddling with the dials here. And there are a lot of things that have been learned from this crisis that are ways of mitigating some of the risk, especially in the mortgage lending.

I mean, for sure, people should be paying down payments, and regulators should be requiring that. There was a great experiment done, starting in the late 1990s, to see, can we drive home ownership from the low 60s to the high 60s. Well, that looks like an experiment gone wrong. The low 60s looks like the right level for home ownership, and the high 60s too high.

And that is, in many ways -- I mean, although all of these exotic instruments built on that bad initial policy decision, that was the motor for the crisis.

ZAKARIA: And your argument, to make the political point clear, is that that decision was fundamentally a decision that was driven more by Democrats than Republicans.

FRUM: It was drive by both parties. No, look, the Bush administration was in it up to its eyeballs.

NAOMI KLEIN, AUTHOR, "THE SHOCK DOCTRINE": They pioneered the whole concept of the ownership society. I mean, this was Bush's big idea at the beginning of his term. And the centerpiece of the ownership society was getting low-income people, particularly minorities, into homes that, as it turns out, they couldn't afford.

ZAKARIA: And was that a bad idea? Don't you believe...

KLEIN: I think the way he...

ZAKARIA: ... in spreading the wealth?

KLEIN: Well, I think he -- I think that the real issue there was inequality. And this is -- and how we address deep inequality.

So, I think it was understood at the very start that this was a potential bubble. And this is what I think a lot of people didn't understand about the ownership society idea from the beginning.

Why was Bush so behind it? I don't think it really was because he wanted African Americans to be in homes, necessarily. I think it was because it was understood on Wall Street that this was a potential bonanza.

(CROSSTALK)

It was simultaneously a war on public housing. I mean, just, this idea that...

I think he was behind an ownership society, because we all agree on ownership. Somebody's great saying was, nobody's ever washed a rental car. Ownership is good.

David, where I disagree with you is, whose risk? And I think this is Fareed's question, got it exactly right.

If I'm playing, and it's your risk when things go south, but my game when things turn out, then you get a fundamental asymmetry.

And the problem we've had in Wall Street is that banks used to lend, keep part of the risk, and therefore, judgment was inherent in that decision. When you...

ZAKARIA: Because they were gambling with their own money.

SPITZER: Their own money.

ZAKARIA: When these banks were private partnerships, they were gambling...

SPITZER: Exactly.

ZAKARIA: ... with their own money.

SPITZER: Now they're playing with our money. Other people's money is the greatest elixir to a bubble anywhere.

FRUM: But there are some undramatic, fairly technical things you could do that, without changing the whole way American finance works, would address that problem. For example, if you said, when banks write mortgages, they have to keep a certain portion of the mortgages they write -- a fifth, a third. They can sell the rest.

And when they're selling 100 percent, then they have some bad incentives, obviously, before them. They know the loan best. They should keep the loan.

ZAKARIA: Stephen...

FRUM: And on a random base, not the good ones.

ZAKARIA: If there's an animating idea to Freakonomics, it is basically that there are all kinds of unintended consequences to decisions that you make. You know, people get perverse incentives to do things.

So, when you look at this, can you imagine regulation being put in place that will prevent people from gaming things?

I mean, I'm thinking of 1993. They decided CEOs and bankers shouldn't be paid so much money in cash, so they said, you should all get stock options instead.

And, of course, what happened was, you had a 10-year bull market. These people were now being paid 10 or 15 times what they would have been paid, had they just been paid in cash.

STEPHEN DUBNER, CO-AUTHOR, "FREAKONOMICS": Yes. I think, if we were to agree that the mess that we're in is a result of the housing bubble -- which is a pretty big assumption, because there are other parts of it. But if we were to isolate it on that, then I would say that, basically, everything you've said -- there are pieces in what everybody has said at the table here that are fundamental to the problem.

The problem is that, when you set up a kind of food chain, which is what we had, where everybody's incentives are aligned with themselves and with nobody else -- you can call it whatever you want, passing the risk along, negative externalities, not paying the costs of your actions. But that's what we had.

So, the mortgage process that we had, where I can buy a house with a liar's loan, and where the mortgage broker encourages me to use a liar's loan, where the seller offers a cash kick-back to help me not only buy my house with no cash, but then to have some money to buy furniture when I get it -- on and on. The banks are selling off the mortgages. They're being packaged and sold to people who don't know what's in them.

At every stage, the people who are incurring the benefit are passing along the risk.

It reminds me a little bit of, if I wanted to open a restaurant in an airport that had traffic only going out, OK, I can serve the people whatever crap I want. It can be past its date. It can be cooked poorly. It can cost 10 times what it should cost. Once they're gone, they're not my problem anymore. And that's what we've seen.

Now, can that be fixed? Absolutely. It can be fixed from the mortgage end, from the regulatory end. It doesn't mean it's easy. You guys all traffic much more in politics than I. The reason I don't is it's too hard.

I can pretend to solve a problem on paper, but actually getting people to do it in legislatures, that's another story.

ZAKARIA: Naomi?

KLEIN: I mean, this is the key issue. Because, in fact, there have been all kinds of good ideas that have come and gone in the year- and-a-half of this crisis. And again and again, they've been defeated on Capitol Hill, which, you know, as Dick Durbin said, the banks own this place.

All of these commonsense proposals come and go, whether it's direct help for homeowners. Nothing gets through. So, ultimately, this comes down to politics, but it also comes -- for me it comes down to campaign finance reform, and the fact that there's just such a -- there's legalized corruption in this country.

SPITZER: I totally agree with everything you've said. What's amazing now is the politics. The left and the right are converging on similar ideas and agreeing that the Fed, AIG, that is where it all converged. That is the black box, the center of the web. And somehow, the transparency we need there is essential.

But you're right. The good ideas are not being enacted. There is a status quo mentality on Capitol Hill that is pervasive and very, very disappointing.

FRUM: The fix is here. There's a -- let's do -- there are technical fixes, the kinds of things I've said about the way banks hold their securities.

And then, be careful about doing too much, because you can throttle something that I think is precious to everybody, which is the creativity of the system.

SPITZER: Well, let me respond. I got it. Not to make this partisan, but...

(LAUGHTER)

... statutes don't work. Enforcement does.

We have had for 15 or 20 years an absence of enforcement, except with a few nodes of activism, which gets beaten down over time.

What we need is adherence to very simple principles of ethics and transparency in the marketplace. And then, it would work.

ZAKARIA: On that note, we are going to take a break and come back, and discuss all of this and more. We will be right back.

(BEGIN VIDEO CLIP)

KLEIN: This idea that we are going to squelch creativity, you know, I think there's definitely been too much creativity in the realm of derivatives trading. I mean, we would all do with them being a little less creative, and maybe go into the arts, you know, take up creative writing.

(END VIDEO CLIP)

(COMMERCIAL CLIP)

ZAKARIA: And we are back with our star-studded panel -- Eliot Spitzer, David Frum, Naomi Klein and Steve Dubner.

What should be the purpose of financial regulation moving forward?

KLEIN: And this isn't a free market system. That's what's been revealed in this crisis. It's a classic, crony capitalist system, where favors are traded amongst the elites.

And, you know, I have to -- this idea that we are going to squelch creativity, you know, I think there's definitely been too much creativity in the realm of derivatives trading. I mean, we would all do with them being a little less creative, and maybe go into the arts, you know, take up creative writing.

(LAUGHTER)

This is not helping. But the idea...

ZAKARIA: Because the bonuses are huge in the arts.

(LAUGHTER)

KLEIN: But the idea that we suffer from an under-reaction...

SPITZER (?): If you (UNINTELLIGIBLE) long enough they are, if you have possession of the tapes (ph).

KLEIN: The idea that we suffer from an under-reaction to this crisis -- an over-reaction to this crisis -- to me is absurd. I mean, this has been the most incredible under-reaction, if we look at what we have some consensus about in terms of what caused the crisis.

The over-leveraging of the banks, the fact that derivatives are not regulated, the fact that the banks are too big to fail, the fact that they've become so intermingled -- we have not dealt with a single one of them, a single one of them, a year-and-a-half later. We have not reacted.

And in the meantime, we've put around $14 trillion on the table and used none of the leverage. And the whole premise of banking is that, when you're handing out money, you can put conditions on it. You can ask for all kinds of things. And it is just extraordinary that they blew that moment of leverage.

DUBNER: Can I ask you a question? So, you seem to -- I may interpret this wrong -- but you seem to feel that government is kind of handcuffed in this situation. You feel that -- you three have very different views -- I'm sorry. I don't mean to be jumping in your chair.

(LAUGHTER) It's just that there's interesting perspectives. We all have -- we have some very, very different views of how and why and to what end government should be regulating, intruding, whatever we want to call, in all these different realms.

My question to all of us is, however, no matter what you want and think is not being done, no matter what you're afraid may be done, to me the question is the larger one, which is, government right now in Washington is at this bizarre place -- we were talking about this earlier -- where, if it's not paralyzed or broken, it's pretty darn close.

It's really hard to -- it's really hard for me, as someone who doesn't really traffic in the political realm willingly or all that often, to see, where's a good outcome here from a political perspective, because I don't see it.

ZAKARIA: And by the way, on any issue, if you look at, you know, immigration, energy, it's just -- it's paralyzed, in general.

FRUM: The United States government doesn't govern all that well. We'll concede that. But the American private sector does deliver unbelievable things.

And we're sitting here at the end of a period of extraordinary technical innovation. And not just -- I mean, the Internet, we're all familiar with. But all kinds of products, and products that people want.

The ability of people to tap the equity in their homes when they face a financial crisis, that is a good innovation. The availability of more than one -- lots of kinds of mortgage to people in different kinds of circumstances.

There are a lot of reasons why a rational person might intelligently want an interest-only mortgage. That can be a useful instrument.

We have the ability to raise capital to finance development all over the planet. And the idea that...

(CROSSTALK)

... you say, well, let's give it to the poets (ph), I mean, I'm all for the poets (ph). But what we -- to be at the end of this period, it's like being in one of the railway crises of the middle 19th century and saying, eh, nothing real was accomplished. Something real was accomplished over the past 20 years.

(CROSSTALK)

SPITZER: (UNINTELLIGIBLE) very effectively to then beat it down.

All of us here -- I'll talk for myself. I don't want to speak for others. I am a devout capitalist. I believe in the creativity, the innovation, the conflict that emerges -- let me finish. The reality is that we have an economy right now that has tremendous innovative capacity, but also, over a 10-year period, has not created any net jobs. And the distribution of those proceeds is getting less and less equal. And our position vis-a-vis the rest of the world in terms of debtor-creditor situation, our world power -- 100 different metrics you could use -- we're on the losing end.

And therefore, we have to step back and say, how do we extend those benefits, and both continue them and make sure we create an environment where they can...

(CROSSTALK)

ZAKARIA: But do you worry that you're...

SPITZER: And that's where we are not...

(CROSSTALK)

FRUM: I'm not going to dispute with you on that. And it's true. I mean, not enough of this came through to the typical worker during the years from 2001 to 2007. That was a big problem.

And there a lot of things we can talk about to fix that, including getting control of health care costs, which has been the great burden on the incomes of middle income people.

But let us not crush the creativity. And let us not look for a financial solution to economic problems.

ZAKARIA: On that note, thank you all very much. We will be back right after this.

(COMMERCIAL BREAK)

ZAKARIA: Now, for our "What in the World?" segment.

What got my attention was this. It isn't some Disneyland re- creation of how things were done in ancient times. It's a camel running a sesame mill. And it's happening now -- in the nation of Yemen.

I think when the politicians and pundits rattle their sabers and speak of the new front on the war on terror in Yemen, and when officials talk about partnering with Yemen's government to bring stability and economic development to that country, I despair.

Here we go again.

Look. Yemen is an anarchic, desperately poor country, stuck hundreds of years in the past. It is in the midst of a civil war in the north, and it has a south that has been trying to secede since 1994.

Yemen's capital, Sana'a, may be the first in modern history to have to physically pick up and move, because it ran out of water. But the government in that capital has seemingly little control anywhere. In much of the country, tribal customs are the only law of the land, and that land is mostly desert. Only one quarter of one percent of Yemen is permanently planted with farms.

It's a nation where most of the men and boys walk around with sharp daggers under their belts. Half the population is under 14 years of age. The same amount -- approximately half the country -- is illiterate. Again, about half live on less than $2 a day. It has the fourth highest population growth rate in the world.

And what isn't growing in Yemen is its oil supply. In fact, it's shrinking.

Experts think there is less than 10 years of oil left. And that is bad news for a country where oil funds almost three quarters of the nation's budget.

Ali Abdullah Saleh, the man responsible for this country, the president of Yemen, has been called by some "little Saddam." And his nation is often referred to as "Afghanistan by the sea." But I would argue that the comparison is unfair -- to Afghanistan.

Anyway, look. Some militants associated with al Qaeda have moved into Yemen, precisely because it is an utterly lawless, chaotic country with no functioning government, and utterly backward. To hope that we can bring order there is to set ourselves up for failure.

Let us keep our attention on the small number of terrorists in Yemen and try to tackle them. Even if we did manage to bring good governance to Yemen, that small number of terrorists wouldn't really care.

We will be right back.

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CHRISTINE LAGARDE: When you tell somebody that you're going to levy 50 percent of those large bonuses, it's never very pleasant.

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ZAKARIA: Those monster bonuses that bankers have given themselves, the ones that are making the populists' blood boil across the world, well, France is trying a drastic method to curb them.

The French finance minister, Christine Lagarde, in concert with her British counterpart, has levied a 50 percent tax on banker bonuses. Christine Lagarde joins me today from Paris.

Christine, when you imposed this tax, did you worry about the outrage that it is surely causing among the financial industry in France? CHRISTINE LAGARDE, FINANCE MINISTER OF FRANCE: I did think about it, because that is inevitable. When you tell somebody that you're going to levy 50 percent of those large bonuses, it's never very pleasant.

But equally, I think it was the right political message. And it was perfectly appropriate and legitimate to do so this year, because last year was totally exceptional. Banks needed taxpayer support. We needed them to be operating, moving money around and lending to the economy.

But equally, when things turned around, it was equally appropriate and legitimate that some money be given back to the taxpayers.

ZAKARIA: But you know what the banks say. The banks say, "Look, we are large, global institutions. We're operating all over the world. This is one of the areas where Western countries are very competitive. And what you are doing is, you are now crippling us, just as we are recovering."

LAGARDE: You know, Fareed, when I look at the forecast and the predicted results, I wouldn't suggest that they are likely to be crippled by a 50 percent levy on compensation paid to their traders. I don't think so.

I think that they have been able to clearly recover. And I'm very pleased for them, and we need banks that are solid and healthy and secure. But I'm not about to cripple them, no.

ZAKARIA: And do you worry about French bankers moving to London or other places?

I realize, of course, London has an almost exact equivalent to your tax. But is there -- you know, could they move to Geneva? Or could they move to Frankfurt?

LAGARDE: As you said, the virtue of this taxation on bonus is that we have decided it jointly with the U.K. So, the temptation to go across the Channel is, I don't think really an option.

And I hope very much that banks that are operating in Paris at the moment will continue to do so, and will appreciate that public opinion throughout Europe, certainly, and probably in the United States, as well, would be pretty much outraged if they were to relocate activities elsewhere, just because they want to avoid paying tax, but (ph) were very pleased to find in bad times when they needed support.

ZAKARIA: Do you think that, when you look at the bankers you're talking about -- and I think this affects about 2,500 French bankers -- do you think that they understand that what you're saying is, "Look. You appealed to the French government for support in the bad times. And now, in the good times, you need to pay your share."

Is there that sense of national solidarity? Or are bankers now global citizens, perhaps not in the best sense of the word, in that they'll just move on to another country?

LAGARDE: Well, one observation, Fareed, is that, in good times you're a global citizen. In bad times, suddenly you become a national citizen, and you know which door to knock on.

And I would certainly hope that they -- that there is that feeling of solidarity, of joint interest, and of this give-and-take principle where, when you need help you find it, but equally, you contribute.

ZAKARIA: What about President Obama's proposed tax? What do you think of the American proposal? Do you think -- why do you prefer yours? Do you think it's legitimate?

LAGARDE: I applaud the system that is being proposed by President Obama, and which Tim Geithner described for me yesterday. It's very balanced. It's, as I said, legitimate, reasonable and perfectly understandable.

The system is different, as I understand it, because the bailout plan cost a lot of money and created some loss, which President Obama indicates he wants to recoup entirely, so that there is not a penny -- not a dime, actually -- left on the shoulders of the U.S. taxpayer.

In our case, it's not as big a plan, nor as long a plan, because in the bailout plan that we put together, we did not lose any money. We actually charged interest on the banks, and we've recovered and made some profit in the process.

But that was probably because French banks were not as affected, were not as burdened as others.

ZAKARIA: Thank you very much, Madame Lagarde. We hope to have you on again.

LAGARDE: Bye-bye.

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ZAKARIA: Now, for our "Question of the Week."

Last Sunday I asked you whether the uproar over the attempted airplane bombing on Christmas Day -- the new security rules, the intelligence reviews, the partisan fighting -- amounted to an over- reaction.

I told you my opinion, that it was an over-reaction. And I thought you would take me to task for that. But I was wrong. More than three quarters of you agreed with me.

Michael Chase Walker from the Los Angeles area wrote, "I couldn't agree more. The U.S. has become the living image of a grand elephant terrified of a teensy mouse."

On the other hand, Maria from Cape Cod did take umbrage with my opinion, saying, "I think it was irresponsible for Mr. Zakaria to imply that we are overreacting to the attack, which almost claimed 350 American lives."

This week, I'd like to know your thoughts about Haiti. Even before the terrible suffering and devastation we've witnessed this week, Haiti was one of the most fragile countries on earth. Now, almost none of the basic infrastructure of a state have been left intact.

Do you think the United States ought to expend large amounts of money and resources to rebuild Haiti? How much can or should the United States do to save a country with problems as deep as Haiti's? Will it do anything?

Let me know what you think.

And as always, I'd like to recommend a book. It's by Tracy Kidder, one of my panelists on Haiti today, and his book is on that subject, too. It's called "Mountains Beyond Mountains: The Quest of Dr. Paul Farmer."

Farmer is a professor at Harvard, a physician, a medical anthropologist, a MacArthur genius. And according to at least one of his Haitian patients, a god.

Farmer's guiding philosophy is, the only real nation is humanity. And Haiti is one of the pet projects he has dedicated his life to.

Kidder goes along with him for the ride as he cares for the underdogs of the underdogs. This book will give you a great insight into the humanitarian crisis that was extent in Haiti long before this week's earthquake.

Paul Farmer, by the way, was Hillary Clinton's choice to oversee all American foreign aid until the confirmation process in Washington became too cumbersome, and Paul Farmer withdrew.

Before you go, I want to tell you that we have relaunched our foreign affairs quiz. Test your knowledge by taking the Fareed Challenge. It's even more fun than before, and you can find it on our Web page, cnn.com/gps.

Thanks to all of you for being part of my program this week. I will see you next week.